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Edited Transcript of UNP earnings conference call or presentation 23-Jan-20 1:45pm GMT

Q4 2019 Union Pacific Corp Earnings Call

OMAHA Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Union Pacific Corp earnings conference call or presentation Thursday, January 23, 2020 at 1:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer L. Hamann

Union Pacific Corporation - Executive VP & CFO

* Kenyatta G. Rocker

Union Pacific Railroad Company Inc. - EVP of Marketing & Sales

* Lance M. Fritz

Union Pacific Corporation - Chairman, President & CEO

* Vincenzo James Vena

Union Pacific Corporation - COO

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Conference Call Participants

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* Allison Ann Marie Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jairam Nathan

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, Research Division - MD & Analyst

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Presentation

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Unidentified Company Representative, [1]

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Thank you for accessing Union Pacific Corporation's 2019 Fourth Quarter Earnings Conference call held at 8:45 a.m. Eastern Time on January 23, 2020, in Omaha, Nebraska.

This presentation and the accompanying materials include statements that contain estimates, projections or expectations regarding the company's financial results and operations and future economic conditions. These statements are forward-looking statements as defined by the securities laws.

Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The materials accompanying this presentation include more detailed information regarding forward-looking information and these risks and uncertainties. In addition, please refer to the company's website and SEC filings for additional information about our risk factors.

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Operator [2]

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Greetings, and welcome to the Union Pacific Fourth Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Mr. Fritz, you may begin.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [3]

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Thank you, Rob. Good morning, everybody, and welcome to Union Pacific's Fourth Quarter Earnings Conference call. With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and sales; Jim Vena, Chief Operating Officer; and Jennifer Hamann, our Chief Financial Officer.

This morning, Union Pacific is reporting 2019 fourth quarter net income of $1.4 billion or $2.02 per share. This compares to $1.6 billion or $2.12 per share in the fourth quarter of 2018. Our quarterly operating ratio came in at 59.7%, a 1.9 percentage point improvement compared to the fourth quarter of 2018. This represents a fourth quarter record and the third straight quarter with an operating ratio that starts with a 59. That's a remarkable achievement given the volume challenges we experienced in 2019.

Before we go any further, I want to recognize all of our employees for their remarkable service and productivity achievements in 2019. The women and men of Union Pacific are transforming our railroad. Step-change increases in car velocity and trip plan compliance while using 1/3 fewer cars and locomotives takes ingenuity, initiative and teamwork. And the team, through the implementation of Unified Plan 2020, is changing our network in fundamental ways to be safer, more reliable and more efficient.

With that, I'll turn it over to Kenny to provide more details on our results.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [4]

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Thank you, Lance, and good morning. For the fourth quarter, our volume was down 11% primarily due to declines in premium and the energy business groups. The decrease in volume, partially offset by a 1% improvement in average revenue per car, drove freight revenue to be down 10% in the quarter. Let's take a closer look at the performance for each of the business groups.

Starting off with ag products. Revenue for the quarter was down 2% on a 2% decrease in volume and flat in average revenue per car. Grain carloads were down 1% as fewer domestic shipments were partially offset by modest gains in exports. Volume for grain products was up 2%, driven by an increase in ethanol from the Midwest to East Coast markets. Fertilizer and sulfur carloads were down 13% primarily due to weakness in export potash.

Moving on to energy. Revenue was down 25% as volume declined 20% coupled with a 6% decrease in average revenue per car related to negative mix with the loss of long-haul sand volume. Sand carloads were down 53% due to the impact of local sand as well as a slowdown in market activity. Coal and coke volume was down 25% due to weaker market conditions resulting from lower natural gas prices and soft export demand. In addition, contract changes also impacted volume in the quarter.

However, on a positive note, favorable crude oil price spreads drove an increase in crude oil shipments, which was the primary driver for the 19% increase in petroleum, LPG and renewable carloads for the quarter. And we expect to see this positive trend for crude oil to continue in 2020.

Industrial revenue, volume and average revenue per car were flat for the quarter. Both construction and plastic shipments have been strong in all of 2019 and continue to be favorable in the fourth quarter as well. Construction carloads increased 5% primarily driven by strong market demand in the South for rock shipments.

Plastics volume increased 2% due to plant expansions but tempered due to soft domestic demand. Forest products volume decreased 8% driven by softness in the lumber and paper markets.

Turning to premium. Revenue for the quarter was down 14% on a 15% decrease in volume, while average revenue per car improved by 1%. Domestic intermodal volume declined 8% primarily driven by an abundant truck supply coupled with softer demand during peak season. International Intermodal volume was down 23% during the quarter, reflecting weak market conditions related to trade uncertainty and a challenging year-over-year fourth quarter comp driven by accelerated shipments in 2018 seeking to avoid tariffs.

And finally, finished vehicle shipments were down 13% for the quarter, reflecting weak year-over-year auto sales coupled with the GM labor strike. Fourth quarter U.S. auto sales were down approximately 1% from 2018. Strong light truck and SUV sales did not fully offset declining car demand.

Going forward, we will begin to report on our 3 business groups: bulk, industrial and premium. For 2020, in our bulk segment, we expect coal to experience continued challenges with volume in the New Year, and weather conditions will always be a factor for coal demand. However, on a positive note, we anticipate continued strength in advanced biofuel shipments and associated feedstock due to an increase in demand.

We also expect stronger beer shipments along with long-term penetration growth across multiple segments of our food and refrigerated business. In addition, with the recent signing of the Phase 1 trade deal with China, we expect to see those ag exports resume in the latter half of the year.

For industrial, local sand supply will continue to further impact volume. However, we anticipate an increase in plastic shipments driven largely by plant expansions coming online this year as well as continued strength in the construction market in the South. Additionally, we expect favorable crude oil price spreads to drive positive results for petroleum products.

And lastly, for premium, the U.S. light vehicle sales forecast for 2020 is 16.7 million units, down between 2% to 3% from 2019. Consumer preference for SUVs over sedans will continue to partially offset the decline in car demand. Domestic intermodal volume is sequentially strengthening, however, will continue to be impacted by truck competition in the first half of 2020.

From where we sit today, we expect a more balanced supply/demand in the truck market by mid-2020, which supports intermodal competitiveness during the second half of the year. We expect international intermodal to return to normal seasonal flows but faces tough year-over-year comparisons in the first quarter due to the accelerated shipments seeking to avoid tariff increases in early 2019.

As we begin 2020, I feel really good about where we're headed. Our service product has improved significantly, and the table is set for us to grow and win business with our customers. I'm excited to see the benefits of an improved supply chain continue for our customers.

And with that, I'll now turn it over to Jim for an update on our operating performance.

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Vincenzo James Vena, Union Pacific Corporation - COO [5]

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Thanks, Kenny. As you've already heard this morning, we continue to deliver strong results, which I think speaks volumes for what is possible. Our operating metrics continue to improve. And as a result, we are seeing a better service product for our customers. The team, once again, responded to the challenge of rightsizing our cost structure in the face of declining volumes while also driving significant productivity. And I couldn't be more proud.

For example, crew starts were down 20% in the quarter and outpaced the 11% decline in carloads we experienced. This, along with our Unified Plan 2020 actions, drove an operating ratio of 59.7%, which was outstanding. While we will continue to drive productivity, it cannot come at the cost of safety. As always, safety remains our #1 priority at Union Pacific.

Turning to Slide 11. I'd now like to update you on our 6 key performance indicators. We continue to see significant year-over-year improvement in our metrics. This is a direct result of our relentless focus on improving network efficiency and service reliability as part of Unified Plan 2020. Continued improvement in asset utilization and fewer car classifications led to a 5% improvement in freight car velocity and a 13% improvement in freight car terminal dwell compared to the fourth quarter of 2018. Train speed for the fourth quarter increased 1% to 26.2 miles per hour compared to 2018.

Now turning to Slide 12. Continuing our trend from the third quarter, locomotive productivity improved 14% versus last year as efforts to use the fleet more efficiently enabled us to park units. As of December 31, we had around 3,100 locomotives stored, which excludes 300 units that were either sold or retired. Driven by a 17% decrease in our force levels, workforce productivity increased 4% year-over-year despite the volume decrease.

Car trip plant compliance improved 9 points year-over-year driven by increased freight car velocity and lowered dwell, demonstrating our team's commitment to delivering a consistent and reliable service product for our customers. We are pleased with our progress in 2019, and we expect to see continued improvement in our service product going forward.

Slide 13 highlights some of the recent network changes we have made as part of the Unified Plan 2020. We recently stopped humping cars at Davidson Yard in Fort Worth. We also reduced switching at our Settegast Yard in the Houston area and shifted the work to nearby Englewood Yard. On the third quarter earnings call, we talked about a change in Kansas City to stop humping cars at Neff Yard. Building on that change, we recently curtailed operations at Armourdale Yard and moved the work to a single location at our 18th Street Yard for the entire Kansas City complex.

In addition, we continue to adjust our local operations to align with customer demand while remaining focused on delivering the quality service product. Going forward, we will continue to look for ways to reduce car touches, leading to additional terminal rationalization opportunities on our network.

Increased train size remains one of our main areas of focus to utilize our existing network capacity, and we are making excellent progress. By putting more product on fewer trains, we have increased train length across our system by 16% or over 1,100 feet since the fourth quarter of 2018 to approximately 8,200 feet in the fourth quarter of 2019. Looking forward, I expect to see continued improvement in train length through a combination of transportation plan changes and targeted capital investments that I will talk about more on the next slide.

In 2019, we invested approximately $3.2 billion in railroad infrastructure. Pending final approval by our Board of Directors for 2020, we are targeting base capital spending of $2.95 billion with an additional $150 million for strategic siding extensions. About 80% of our planned 2020 capital investment is replacing spend into -- is replacement spending to harden our infrastructure, replace older assets and to improve the safety and resiliency of the network. We will purchase no new locomotives in 2020, although we will continue to modernize our existing fleet.

Targeted freight car acquisitions will support both replacements and growth opportunities. We will continue to invest in capacity projects on our network to improve productivity and operational efficiency, including investments that support the consolidation of intermodal operations in Chicago. We also planned strategic siding extensions to increase train length capability in targeted locations. These sidings will support our efficiency initiatives by increasing the number of long trains we can operate in each direction, thus reducing demand for crew starts. Positive train control spending will focus on interoperability testing and an enhancement to our energy management system to reduce fuel consumption.

To wrap up, we have made a number of changes to our operation in the last year, and the results have been tremendous. However, there are still a lot of opportunities ahead of us to further improve safety, asset utilization and network efficiency. As we move forward, look for us to continue pushing the envelope as we transform our operations. Running a safe, reliable and efficient railroad for all of our stakeholders is job one, and our team is committed to making that happen.

And with that, I'll turn it over to Jennifer.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [6]

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Thanks, Jim, and good morning. Today, we're reporting fourth quarter earnings per share of $2.02 and 1.9 points of year-over-year improvement in our operating ratio to 59.7%. This is an all-time best fourth quarter operating ratio for Union Pacific and our third consecutive quarter starting with a 59.

As shown on Slide 17, we received a partial insurance recovery of $40 million associated with the flooding experienced in the first half of 2019 $25 million of the $40 million reduced fourth quarter operating expense, adding $0.03 of EPS to the quarter as well as helping the operating ratio by 0.5 point.

Lower year-over-year fuel prices favorably impacted the quarterly operating ratio by 0.2 points, although our fuel surcharge lag actually had a $0.01 negative EPS impact compared to 2018. The good news is that, in the face of significant volume headwinds, we drove core margin improvement of 1.2 points in the quarter. These results are a proof statement that, through our company initiatives to improve productivity, the UP team is having great success running a more efficient, reliable network.

Looking now at our fourth quarter income statement. Operating revenue totaled $5.2 billion, down 9% versus last year on an 11% volume decrease. Operating expense decreased 12% to $3.1 billion as we demonstrated our ability to be more than volume variable with our cost structure. These results net to operating income of $2.1 billion, a 5% decrease versus 2018.

Below the line, other income increased 22%, driven by reduced environmental and benefit plan costs, partially offset by lower real estate sale gains. Quarterly income tax expense increased 3% on a higher effective tax rate. For full year 2020, we expect our annual effective tax rate to be around 24%. Although net income of $1.4 billion was down 10% versus last year, our fourth quarter earnings per share only decreased 5% to $2.02 per share as our continued share repurchase activity offset roughly half of the income impact.

Slide 19 provides a breakdown of our fourth quarter freight revenue, which totaled $4.9 billion, a 10% decrease versus 2018, driven primarily by an 11% volume decline. Additionally, fuel surcharge revenue had a 1% negative impact to revenue, down $125 million to $363 million. Although not able to offset the impact of volumes and fuel, the combination of our ongoing pricing actions and business mix had a 2.5 point positive impact on our quarterly freight revenue. Consistent with our guidance throughout 2019, total dollars generated from our pricing actions for the year well exceeded our rail inflation costs.

As Kenny mentioned, we will begin reporting under our new business team structure at our first quarter call. In mid-February, we will provide a mapping of our carload volumes to the new business groups and make available proforma volume and revenue for prior years. At the same time, we also will start providing weekly revenue ton-miles across key market segments beyond the 3 new business teams.

Slides 20 and 21 provide a summary of our fourth quarter operating expenses. Starting with compensation and benefits expense. This category decreased 18% to $1 billion, driven by a 17% workforce reduction or about 7,100 FTEs versus 2018. Our productivity initiatives, coupled with lower volumes, resulted in a 20% decrease in our train and engine workforce, while management, engineering and mechanical workforces together decreased 16%.

Fuel expense fell 20% to $512 million as a result of lower diesel fuel prices and fewer gallons consumed through more efficient operations. And through a combination of reduced purchase transportation, lower mechanical repair costs and less contract services and materials, our purchased services and materials expense declined 9% to $531 million.

Turning to Slide 21. Depreciation expense of $559 million increased 1% compared to 2018. Equipment and other rents of $230 million decreased 14% driven primarily by lower equipment lease expense and less volume-related costs. Other expense increased 5% to $231 million as a result of increased casualty costs and higher state and local taxes, partially offset by the insurance recovery I previously mentioned. For full year 2020, we expect year-over-year depreciation expense to increase about 2% and other expense to be up roughly 5%.

Looking now at productivity. Net productivity savings, driven by our G55 + 0 initiatives and Unified Plan 2020, totaled approximately $215 million in the fourth quarter. These results bring our full year 2019 net productivity to $590 million, which significantly exceeded our guidance of at least $500 million and marks an all-time-high annual productivity savings for Union Pacific. This really is a remarkable accomplishment for the UP team considering the backdrop we achieved this against: unprecedented flooding and a weakening environment.

Stepping back to look at full year 2019. We reported earnings per share of $8.38 a share, a 6% increase versus 2018 despite facing volume and revenue declines of 6% and 5%, respectively. Importantly, as a result of the strong productivity gains I just discussed, we held operating income flat year-over-year at $8.6 billion. As you know, over the course of 2019, we had a number of different items that impacted our operating ratio and earnings. But when you set all that aside, the important measure for us is improvement in our core performance, which was nearly 2 points better versus last year as we met our guidance of a sub-61% operating ratio for 2019. And we can't talk about a full year operating ratio of 60.6% without acknowledging the hard work and dedication of our workforce. These results could not have been achieved without them. So hats off to the team.

Turning now to cash and returns. 2019 was another year of both strong cash generation and cash returns to our shareholders as free cash flow after capital investments totaled nearly $5.2 billion, resulting in a cash flow conversion rate equal to 87% of our net income. Beyond continuing our strong program of capital investment, we rewarded shareholders with two 10% dividend increases in the first and third quarters, bringing our dividend payout ratio to just over 44% as we distributed $2.6 billion.

We also repurchased 35 million shares of our common stock at an all-in cost of $5.8 billion, reducing our full year average share balance by 6% versus 2018. In combination, the dividends and share repurchases added up to a total of $8.4 billion of cash returned to our shareholders.

In addition to the cash-generating power of our business, we funded part of this cash return through the strength of UP's balance sheet. We ended 2019 with an all-in adjusted debt balance of $27.4 billion, up $2.3 billion from year-end 2018. Our solid investment-grade credit rating and a very attractive rate market allowed us to issue $4 billion of new debt during 2019, partially offset by the repayment of debt maturities. With that, we finished the year at an adjusted debt-to-EBITDA ratio of 2.5x as we are continuing to increase our leverage position to the previously guided target of 2.7x while maintaining minimum credit ratings of BBB+ and Baa1. Finally, our return on invested capital came in at 15%, basically flat with 2018 as we stayed disciplined with our capital spend in a challenging volume environment.

Let me close out today with our view of the year ahead. As we look to 2020, we expect to see volumes inflect to the positive side of the ledger on a full year basis, growing a percent or so overall. This view takes into account expected declines in coal and sand volumes as well as the tough year-over-year intermodal comparisons that Kenny mentioned. Against this volume expectation, we will continue to pursue a pricing strategy where the dollars gained exceed our 2020 rail inflation costs. This expectation is fully supported by the great service product we are providing our customers and is integral to achieving our 2020 and long-term return objectives.

With regard to inflation, we expect overall inflation in 2020 to be around 2% with labor inflation closer to 2.5%. We also expect our workforce to be down around 8% or so on a full year basis.

Coming off of a record productivity performance in 2019, we expect to yield at least another $500 million of productivity savings in 2020 as Jim and team continue to identify and pursue efficiency savings. Together, we believe these activities should result in another strong step-down in our operating ratio. And while we don't anticipate a fuel tailwind like we experienced in 2019, we're confident in our ability to achieve a sub-60 operating ratio. In fact, we believe we should close out 2020 with a full year number that looks more like a 59.

As it relates to our capital allocation, our high-level guidance for capital spending, capital structure and use of free cash flow remains unchanged. The first call on cash is our capital investments, which we still expect to be less than 15% of revenue over the long term and $3.1 billion for 2020. After capital expenditures, we will continue returning cash to shareholders in the form of dividends, maintaining our targeted payout ratio of 40% to 45% of earnings. And we should complete our previously announced 3-year plan to repurchase approximately $20 billion of shares by the end of 2020. That plan is now 70% complete, leaving about $6 billion to repurchase this year.

In summary, we expect positive full year volume, solid core pricing and significant productivity gains will all contribute to another year of strong cash generation and margin improvement. We're taking another positive step forward with our operating ratio in 2020 on the path to our longer-term target of a 55% operating ratio.

So with that, I'll turn it back to Lance.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [7]

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Thank you, Jennifer. As discussed today, we leveraged strong productivity to deliver solid fourth quarter and full year financial results. Unified Plan 2020 continues to serve as a catalyst for improved productivity and a better service product. Looking ahead to 2020, we are committed to operating a safe railroad in providing highly consistent, reliable and efficient service for our customers while focusing on opportunities to grow the business and improve margins. Our strong operating performance in 2019 gives us confidence that, as we attract business to our network, we'll leverage it very efficiently, generating strong free cash flow and improved financial results. That is going to position us to continue investing in our network and returning excess cash to our shareholders.

So with that, let's open up the line for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [2]

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So I wanted to start on the 8% headcount reduction for the year. Just so I understand, is that an average for the full year, or is that a beginning to end-of-year number? Just because if it's an average, it doesn't seem to really imply any additional headcount reductions from here. So I just want to -- is that a right way to think about where we are from a headcount standpoint?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [3]

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Scott, this is Jennifer. Yes, that 8% is a full year average, and it does imply some further reductions from here. I think if you just rolled forward where we're at into 2020, it'd be around 6% or so. So we are looking for further gains. And obviously, volumes will depend on that, and we're going to continue to try to improve our efficiency overall, but that's our view today.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [4]

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Okay, okay. And then on the volume outlook, so slightly positive. Obviously, we're starting in a deep hole. Nat gas is below 2, right? Maybe can you just share sort of what you're assuming for coal volumes this year? And what are maybe the biggest tailwinds that you see in terms of the things out there, Kenny? And then just as we think about the OR guidance and the volume guidance together, what's the sensitivity to operating ratio if you think the volumes ultimately stay negative?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [5]

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Kenny, why don't you take the volume question, and I'll circle back on the OR question.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [6]

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Yes. So first of all, each of our customers have a unique decision tree that they're using when they're trying to figure out whether or not they're going to dispatch coal or they're going to go to natural gas. I can tell you that our commercial and operating team have been really dogged in sitting down with our customers and looking at ways to improve efficiencies in the supply chain, whether that's train length, whether that's cycle times or there's things like forecast and by date. We're doing everything we can to make sure that, that supply chain is competitive.

When you step back and look broadly at the volume outlook, you look at the petrochem industry and the plastic that we will expect to continue to grow. There are some other things along with that, that are not as large in volume like the feedstocks that will help us out. We also expect continued growth in terms of the petrol side of things, so the crude oil business. And then also, if the weather is favorable, the rock shipments in the South, there's still a lot of upside there and a lot of growth in the South.

Now those are just the markets, and you also think about the second half of the year. There are still some positives that I'm expecting will happen on the trade side. And that will not just impact positively on the ag side during the -- call it, the September time range, but also our international intermodal side. So those are things that, from a market perspective, we expect to happen.

Having said all of those things, our commercial team has a very aggressive mindset to say, regardless of whatever the market happens, we need to go out there and win because we have a better service product. So we're going out there. We're creating intermodal products. We've got a -- this is all public information. We have a product for our international intermodal business that's with Northern Iowa Railroad and Valor Victoria. On the bulk side, we're going out and securing more business based on the new service product that we have for our grain products moving West. So you heard about the market, and it's also good that you hear about the mindset of our commercial team.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [7]

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And Scott, regarding your question on the volume, the top side and the impact on OR, the way we've wired up the plan right now and what we've shared with everybody this morning, we do expect to see some volume growth. Now take that exactly as intended, which is it can be very small, but we do expect it to be a plus sign, not a minus sign. And as you point out, the first part of the year is challenged. It's still got headwinds against tough comps on international intermodal and of course, a loose truck market and natural gas pricing against coal. But when you take it all into account, you take some of the impacts that we expect to see from the recent trade deals and tightening of the truck market, we anticipate the second half looks better.

All put together, it wires up for us to something like a 59% operating ratio, and that's what we're pursuing right now. Of course, there's a lot of moving parts, and it's early in the year, so we'll just continue to manage as we see the markets evolve.

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Operator [8]

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The next question is from the line of Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [9]

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If I can just follow up on the last question. Just what level of truck market tightening are you really envisioning? Is it just more of a return to a normal market? Or is it something like a 2018 like an almost [ENV-like] scenario, given the kind of 5 supply-side catalysts we have in place?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [10]

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Yes. So we're seeing it, some tightening occur now. And what I call it is we do feel like we're at the floor. Again, if some of the things play out with trade, we are expecting, by mid-2020 to tighten more. For me to put a hand on whether or not it's going to get back to normal levels, that's hard to say. But we do, in talking to all of our customers and seeing some of the bankruptcies that are taking place in the market, we expect for it to certainly be a better truck environment for us to compete in.

Finally, just as we think about the truck market, I just want to emphasize, on our premium, our intermodal network, our service product has improved better. Customers are seeing less dwell for their commodities. We've talked about the reduced complexities in Chicago. And so all of those things really create a lower cost structure that gives us a lot of confidence that we can compete in the marketplace.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [11]

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Got it. And just a follow-up. Now that you're kind of comfortably into the PSR process, and you're like a sub-60 or, at this point, at least in 2020, what's your line of sight to G55 and kind of when you guys get there? And kind of what level of incremental heavy lifting do you need to get there? I mean, is that mostly a top line driven walk from this point on? Or do you think there are still big cost components that'll get you another 400, 500 basis points more?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [12]

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So Ravi, this is Jennifer. You've heard us talk about the long-term target. And I think you've also heard us say -- and remember that, when we first put that out there, we were not in the phases of adopting Unified Plan 2020. And so now that we're in that, we're even more confident in our ability to get there. But we've also talked about it in terms of kind of the 3 levers in terms of volume, price and productivity. And certainly, what's helped us to this point has been the price and productivity. We've not had as much on the volume side. And so with the great service product that the operating teams put together, we feel very confident about our ability to start bringing that volume on, and we will leverage that very efficiently.

But we still have, obviously, great productivity opportunities ahead as well. We said that we're looking to get about another $500 million here in 2020. That's off of $590 million in 2019. So those are big numbers, and we feel very good about that. So we'll continue to press on all fronts as we move forward.

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Operator [13]

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The next question is coming from the line of Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [14]

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Jennifer, just -- I wanted to follow-up very quickly, if I could, on the headcount question because I actually didn't follow the math on that. If you just take the average levels in the fourth quarter and extrapolate that, it would translate -- that itself would translate to an 8% decline in average headcount. So I could be calculating something wrong, but if you can just offer a little bit more clarification there, just given how important that is to the overall productivity of the company.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [15]

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So thank you. Yes, I mean, the headcount reductions are very important for us overall. We'll continue to push that. The math is assuming some volume improvement and that we want to leverage that very effectively. So we're going to continue to push that forward. And again, we're saying 8% plus/minus is what we're looking for on a full year basis.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [16]

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Okay. And just as a follow-up. Again, I guess this question is for Jennifer. And that's really how do we interpret just conceptually the at least $500 million in net productivity. And the way I've just always thought about it is that it's kind of like the uplift in profits that you expect in a neutral revenue environment. And I just wanted to ask, is that a fair way to think about it?

And also, does the guidance that you're giving for 59% OR assume some drag from mix? Because if you get the $500 million plus and you overlay some revenue growth on it, I would have just assumed the OR improvement would have been better than a 59% OR. So if you can just help us think about conceptually the $500 million relative and kind of layering on the revenue growth on top of that.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [17]

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Sure. So when we think about productivity and talked to you about it, that does exclude volume. So when we talk about being able to turn around and move to the positive side of the ledger, from a volume standpoint, that's where you start talking about incremental margins, which we think could look very favorable for us.

We think we've got a great plan put together for 2020 and feel very good about the guidance that we've given, 59% OR, making another very solid step forward in 2020. And we're looking to do that with not much volume and off of a 6% down year this year. So I think it's a good move for us, next solid step down. And we'll continue to press the envelope, but we want to do it safely, reliably, continue providing a really good service product and keep moving forward. But we're not trying to meter our progress either. We're going to try to go as fast as we can.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [18]

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Yes. Jim, I know you love this question. What inning are you in the PSR process?

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Vincenzo James Vena, Union Pacific Corporation - COO [19]

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Well, baseball's finished. So let's talk football seeing as it's right in the middle of the real exciting part.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [20]

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Okay. What yard line are you on?

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Vincenzo James Vena, Union Pacific Corporation - COO [21]

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Well, I started on the 20-yard line or 25-yard line, and I don't think I've hit the middle of the field yet.

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Operator [22]

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The next question is from the line of Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [23]

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So Jim, maybe a more specific one on efficiency for you. How do you think about fuel as you look at the network here? You have longer trains, a younger locomotive fleet, better horsepower management, but we haven't really seen the improvements in fuel that some of the other peers have done, I think, Canada or even CSX. So what level of confidence do you think you have in that improving? And how big of a needle mover do you count on that in the next couple years?

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Vincenzo James Vena, Union Pacific Corporation - COO [24]

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I think fuel is an area where we can get better. We're investing this year with more locomotives that'll make it even easier for us to be able to get some fuel conservation. So we did a lot of work in 2019, and we see the same sort of trend line going. Every railroad's different in their topography, but we feel that there's still money left on the table that we can save on and be more fuel efficient. Bigger trains, more cars on more -- on less trains is probably the biggest way for us to get more fuel conservation. And I'd be guessing on the final number. We are shooting for an improvement from last year, and we'll continue to have that.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [25]

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And as the pace of improvement start to accelerate here because I think you've been about 1% or 2% the last couple of quarters. But train lengths were up, as you mentioned, about 16% year-over-year. So is this a lagging indicator or something that needs to have a few more things fall into place before you can get some material benefit on that?

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Vincenzo James Vena, Union Pacific Corporation - COO [26]

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I wouldn't change the trend line of what we've done in 2019 as an improvement in the trend line in that low 1%, 1.5% sort of gain that we should be able to be more efficient on fuel. So at this point, that's what I see for numbers.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [27]

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All right. And second, again, just one on exports. Kenny, can you just clarify what you mean on the trade deal in terms of the type of benefit you expect on the ag side and how you think about the export corn, which is down about half when you look at the current marketing here in the U.S.?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [28]

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Yes. So there's -- the larger piece of the pie is really on the soybean side. And that's really more of a -- probably more -- call it more of a fourth quarter type look for us. Brazil comes in during the first part of the year. But then there are some other parts of the grain that we could see a slow uptick in. As you mentioned, corn would be one of them. Milo could be one of them. Wheat would be one of them.

I think it's too soon to tail the timing of it. We've been talking to our customers, and a lot of traders are talking. And I'd expect more clarity as we move throughout the year over the next few months, but what you need to hear is that get in this Phase 1 trade deal. We see it as a positive.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [29]

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Yes. Brian, this is Lance. So the Phase 1 trade deal essentially takes China as a headwind and sets it up to be a potential tailwind, very high level. They're committing to over doubling their purchases of U.S. goods with a concentration in ag and some other areas that, if it comes true or if even a large portion or even half of it comes true, it's a really nice tailwind for us going into the next couple or 3 years. So that there's -- it just basically turns a headwind into a tailwind.

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Operator [30]

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The next question comes from the line of Allison Landry with Credit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [31]

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Could you just maybe speak to the rate of OR improvement throughout the year? And should we expect it to accelerate meaningfully once volumes do inflect positive since you're not currently getting all the full benefits of PSR? I guess, in other words, should second half margins be a lot better than the first half?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [32]

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So Allison, as you know, our margins tend to be -- follow some of the seasonality. We tend to have some of our weakest or, I guess, highest ORs in first quarter improve through the year. Third quarter tends to be our best margins, and then they go down a bit. Some of that has to do with weather. Some of that has to do with the volumes that we're moving. So we don't see anything at this point that would fundamentally change that pattern. We're not going to guide to quarterly numbers, but that's how you could think of it.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [33]

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Okay, all right. That's helpful. And then just another question on the productivity. I guess, first, does that include the lapping of weather and inefficiency costs that you saw in the first part of 2019? And then, Jennifer, I think you said that it does not include incrementals on volume. Is that right? Because I think if I do the math and back out productivity, it seems to imply low teens incrementals on sort of what I'd call organic growth, and normally, you do much higher than that. So if you could help us and walk through that.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [34]

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So to the last part of the question about productivity, I think we said that, that excludes volumes. And so if you put volume on top of that, that helps us drive much better incrementals as we move through the year. So I think that -- what was the first part of your question again there?

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [35]

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Does the $500 million include lapping of the weather and inefficiency costs from the first half of 2019?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [36]

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Yes, yes.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [37]

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Okay.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [38]

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Yes, it starts from scratch.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [39]

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Yes, it starts from scratch, right, right.

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Operator [40]

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The next question is from the line of Ken Hoexter with Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [41]

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And Jim, nice job on the continued improvements or team, I guess, but maybe just digging -- I'm still a little confused by some of the answers upfront. If volumes are up and you're getting pricing -- core pricing gains, it seems like you're targeting a flat employee absolute number given the 8% decline, which would make -- I guess, if you're looking for volumes to increase, maybe that's the flow-through.

And then given the productivity savings, the math would seem to suggest a larger operating ratio improvement. Is there maybe a larger mix negative impact that we're looking at than -- and maybe, Kenny, you can dig into the coal impact. I don't know, maybe it's more export -- loss of export tonnage or contract losses or anything on the domestic side.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [42]

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Ken, this is Lance. And I'll start by just making sure we lay a crystal clear expectation of ourselves in 2020. And that is, we expect, as part of the $500 million in productivity, to have both carryover productivity, which is some of the headcount question that you're asking about as well as incremental productivity. If our volume is flat this year, we're going to have incremental employee productivity. If our volume grows, we will not add back resources at the same pace that we will grow.

Now we're expecting growth to be pretty minor, I think, is probably the right word. And it's largely second half. So we're building kind of a cautious plan that gives us flexibility, depending on what actually occurs as the year progresses. So I just want to be crystal clear about that.

There's -- we're sharing with you what we're comfortable sharing at this point. But the expectation is continued productivity, some carryover, more realized through action, and we've got plenty of actions up against that.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [43]

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Right. And just building off that, I mean, our headcount of 8% plus/minus really is somewhat dependent on what happens with volumes. But again, we feel confident in our ability to drive the productivity. And I think you've seen us do that this year as the volumes have fallen off. We've been very aggressive in terms of the actions that we've taken. And so again, to Lance's point, we feel good about the plan, but there's -- we're sitting here on January 23. There's a lot of the year left in front of us. And we'll take the actions that we need to take, but we're bullish about the opportunities, particularly as we look to see some volume return to us in the back half of 2020.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [44]

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The only thing I'll add, I think you were asking about export coal. And we've said this publicly before. It's a smaller percentage of our coal book. It's less than 10%. But yes, it has been impacted. Our export coal has been impacted. We'll wait to see what happens with both the weather and natural gas. Natural gas plays a much larger role in how our customers are going to decide on what they want to do with coal.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [45]

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Kenny, if I can just get my follow-up with you then. The international intermodal was down 23%, significantly more than the West Coast markets noted. Is that share shift loss of contracts? Is there anything you want to highlight, I guess, as we look to balance that out?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [46]

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Yes. We actually had tougher comps. I mean, if you think -- if you go back to 2018, that fourth quarter, we had a really strong quarter. And so now what you're seeing is just the comps. And we should lap that here in the first quarter of this year -- I mean, yes, the first quarter this year.

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Operator [47]

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The next question comes from the line of Tom Wadewitz with UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [48]

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Wanted to -- this is a question for Jim. When I think about the -- you had a tremendous pace of cost takeout or network improvement. How would you think about the duration of the big cost saves, the network improvement? Is this a 3-year program that you'll still have a lot left to do in 2021? Or is this something where you really capture -- you get from the 25-yard line to the -- into the end zone in 2020? So I just wondered if you could offer some thoughts on that and then also perhaps what the really big buckets are that are left for network productivity.

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Vincenzo James Vena, Union Pacific Corporation - COO [49]

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Tom, thanks for the question. So if we think about this, I've been doing this for way too long. So you never ever stop looking for productivity gains. We always look for what you can do to make the place better. So we -- the team delivered a great 2019. I'd give everybody at Union Pacific a lot of credit with what we were able to deliver, but that's behind us. So moving forward, we have projects that are short term. So we have projects across the entire company that will help us to be able to deliver more productivity. Specifically, we have also some projects that will take a while. We announced over $100 million being spent on sidings. We don't expect to get them in the early part of the year. They'll be later and into next year. So the productivity gains are this year, and we see we have to deliver on that $500 million that we've guided to. And that means across the board, and we see some more coming in the following years.

Never ever in my career have I've gone out somewhere and not found a way to make it a little bit better and improve. So I don't see that ending this year, but there's a big bucket this year, and then it'll get a little tougher as the time goes on.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [50]

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Are there particular areas that stand out if it's train length with some of the further siding investments that's a big lever or a lot left on, I guess, terminal productivity and some of the changes with the hump yards? Or what would stand out as being the greatest remaining opportunities?

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Vincenzo James Vena, Union Pacific Corporation - COO [51]

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Train length is real important. Absolutely, train length is one that we have to deliver on. We think that we can make the terminals even more efficient, so we turn the cars quicker, and it helps the whole fleet. We've got plans to put the intermodal terminals together in Chicago from 6 down to 3. That helps us in the efficiency. The way we handle our locomotives, I think we're not going to get rid of another 2,000 locomotives. We're only running out with just over 3,000 locomotives now but we think there's gains there. There's gains on how we repair cars. There's a repair on -- there's money on gains on how we move our people around the network, the balancing of the network. There's a long list. I could go through and spend an hour taking you through it, but I'm very excited with what we have on the table for this year.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [52]

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Okay, great. So just one last short follow-up. I think a number of the questions on the call are focused on the elements of your guidance. At the end of the day, it does feel like the guidance is somewhat conservative in terms of what you can do on the cost side and putting together some of the pieces. Do you think it's fair for us to take away from the framework that there's an element of conservatism in the guide?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [53]

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Well, I'll start and say, Tom, that it's very early. We typically are confident in the guidance we give at the first part of the years, and we build our plan appropriately. And then what you've seen from us over years is we react as the year is progressing, as things change. And universally, we know how to get productivity, and we're demonstrating we know how to generate an excellent service product.

One of the things we've got to demonstrate this year is growing with that service product. Part of Kenny and the commercial team, they're going to have to learn what the network is capable of and how to sell those products and get customers signed up for them.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [54]

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Yes. And I would just say, to add on to what Lance said, there is -- a 59% OR for us would be a new record level for us. It's an area that we've not gotten to. And so we're going to continue to push the envelope and go as far as we can. But we felt good about the performance that we had this year, but you know we got there a lot differently than the way we thought we did. When you think about the fact that we came into the year thinking we were going to have a couple of points of volume growth. It ended up down 6%. We certainly didn't anticipate the weather events that we encountered. So to Lance's point, we're going to be very diligent about working hard to pull all the levers that we can and be aggressive to make improvements.

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Operator [55]

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The next question is coming from the line of Jordan Alliger with Goldman Sachs.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [56]

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Just 2 questions. Just back on the ag real quickly. Can you talk a little bit about how much the export ag business is to your total ag franchise? And then maybe just to give some sense, what was the adverse impact from exports in 2019?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [57]

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Yes. I'd tell you that, if you look at our grain business, it's a significant piece. I'd tell you it's anywhere from 1/3 to, call it, 40%. What was the second part of your question?

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [58]

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Really just how much was that business, let's say, down given the tariff issues in 2019?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [59]

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I'd call it easily over half. I call it easily over half.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [60]

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Yes, and those impacts, Jordan, that's on basically China getting out of purchasing U.S. soybeans and going down to Brazil. DDGs, which have been on again, off again, were off for a fair period of time. And it impacted even a little bit of corn, a little bit of wheat. So the impact on export grain and grain products was pretty broad.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [61]

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By half...

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [62]

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And the only thing I'll add, Jordan, is that, really, we would see it also open up the imports on the international Intermodal side. I mean, that has a pretty sizable improvement of volume growth there, too. So just keep that in mind, too.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [63]

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So by half, you sort of mean half of the total decline in agriculture? Or I'm just -- didn't know what half meant.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [64]

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Yes. I think that there's a lot of upside here for us going forward on the ag side, and we're going to do everything we do to take advantage of it.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [65]

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Okay. And then just one other question. Just on the -- thinking about the volumes in 2020. How much of the, call it, 1% volume outlook, give or take, is tied to intermodal recovery, whether it be domestic or international? Just trying to get a sense for how big a part of the volume story is related to your views on Intermodal.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [66]

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Yes, Jordan, this is Lance. I don't think we've put a fine point on exactly what volume's going to look like next year, but let's walk you through what needs to happen to have volume growth occur. In intermodal, we need international intermodal to get back to normal, where U.S. consumers feel healthy and they're consuming, and it's coming in off West Coast ports. That's important to us.

Domestic intermodal, we need both consumers to feel good. We need the truck market to tighten up a bit. So the competitive mode isn't quite as price aggressive and loose as they are right now. We need the trade deal to have a real impact on agricultural exports and imports. We need manufacturers in the industrial economy in the U.S. to gain a little bit more confidence and get their feet back under them in terms of capital investment and risk taking, and then we need a continuation of what's going on in the petrochem industry from the standpoint of good feedstocks to make U.S. the cost -- low-cost competitor for plastics manufacturing and finding markets for that plastic. So there's a lot of moving parts there. It's not one thing. And of course, those moving parts will change over the course of the year.

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Operator [67]

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Our next question comes from the line of Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [68]

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There've been a lot of questions about sort of guidance and I guess, maybe I just wanted to think about it this way. When you think about 2020 and your expectations, if you were to see sort of upside to that, where do you think the most likely sort of places that would come from are? Is it more volume stuff that maybe is a little bit less in your control? Or maybe is it a little bit more productivity or things that Jim's doing within the network, so it's a little bit more in your control? I just want to get a sense, if we do see upside to the guidance, sort of where you think it's more likely to be coming from.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [69]

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Yes, Chris, great question, and thank you. So the way I think about it is, if I could just invent the year that I would love to have in 2020, it would a stronger upside. It would be a great mix. If I could magically make it happen, I'd like to see frac sand come back stronger. I'd like to see natural gas to go to $3.50 or $4 and take some of the pressure off coal. And I'd really like to -- Kenny hears this every day, but I'd really like to see and experience the commercial team just relentlessly selling the new service product and getting a lot of traction quickly on convincing our customers that it's got staying power and what it means to their supply chains and being built deeply into their supply chains. That would tee up a pretty sweet year. From the productivity side of the world, I have all the confidence in the world that our operating team, Jim, Tom, they're going after it as hard and strong as they can. And it would be a blessing to have more top line to work with.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [70]

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Okay. Okay, that's helpful. I appreciate that color. And if I could just ask a question, I guess, on price and mix. And I appreciate that the core pricing numbers are not going to be reported anymore, but when you think about some of the moving parts, I guess, sequentially from 3Q to 4Q, just to help us a little bit in terms of what the pricing environment would actually look like today, and I appreciate your comments about what you think about the truckload market, Kenny's comments about how that might change as the year goes on, but from 3Q to 4Q, can you give us a little bit of color directionally how things were kind of moving from a price/mix perspective?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [71]

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Yes, I'll tell you, it's -- you've got formidable competitors on the truck side. And as I mentioned before, we do see that. Look, it feels like it's bottoming out. We're expecting that to improve. You've got to remember, we're coming from a third quarter to fourth quarter where we had improved service products, better dwell, stronger trip plan compliance. And so we really inserted that into a part of our value proposition. So regardless of the competitive forces out there, we want to make sure that we are pricing the product to the value that we're providing.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [72]

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Okay. And anything on mixes like mix from one quarter to the next?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [73]

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Jennifer?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [74]

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I think it was slightly positive year-over-year when you think about, in particular -- although we had coal was certainly down, but the intermodal piece was down significantly as well so a little bit positive.

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Operator [75]

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The next question is from the line of Walter Spracklin with RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [76]

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So going back to volume, I know, Kenny, there's been quite a few swing factors and significant swing factors in your individual line items. I mean, coal was down but intermodal minus 23%. And when you gave your guidance here, we see a bunch of question marks in areas where there has been quite a bit of volatility. Obviously, you haven't put question marks in your model when you came out with your plus 1% volume. So I'm just trying to get a little bit of sense, just directionally, on what you're assuming in, say, your coal ag and intermodal, given how big those are an impact in your overall volume.

On the Eastern rails, for example, I mean, they're guiding minus 15% revenue here in coal. Obviously, you'll be a little less than that, but is a high single-digit decline in your coal business a reasonable bogey for 2020. Intermodal, like you said, I mean, it was down 23%, and it's going to have a tough comp in the first quarter. But again, as -- are you projecting mid- to high single-digit recovery? Just some way to quantify so we can gauge when we go back to investors and say, look, Union Pacific has plus 1% volume growth, and it's predicated on a few things like this, which gives us confidence or lack of confidence just right at this point. With the question mark next to those line items, it gives us a little bit of uncertainty as to what your plus 1% is implying.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [77]

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Walter, this is Jennifer. I'm just going to reiterate our volume guidance and then let Kenny talk about the markets a little bit. So we said that we expect, on a full year basis, to get to the positive side of the ledger. We didn't say plus 1%. We said just get to the positive side. But we are going to have -- that is -- that does mean we're going to have to offset the declines in coal, frac sand and then a tough start to the year with the year-over-year comparisons relative to intermodal. So we haven't sized any of those things in terms of what the level of declines are, and we're not going to, but that's all kind of in that mosaic that we've put together to give you that guidance that we are looking to inflect positive on a full year basis. So Kenny?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [78]

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Yes, we certainly feel the challenges with the low natural gas. Today, again, we're 3 weeks into the month, 3 weeks into the year. I think it's premature to really look out ahead on what's going to happen there. Setting aside the ag and the intermodal business, again, in terms of a timing perspective, the expectation is that the truck capacity, should it tighten up by mid-2020, and the expectation is that, from a trade perspective, things should get better for us in the second half of the year.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [79]

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Okay, understood. And coming back on the OR, and I understand the 55% long-term target, but investors are pushing back a lot now on long-term targets as something to not put a lot of stock in. But clearly, Jim, you've done a tremendous amount of work here. The data looked very, very positive and made a volume environment that to say challenging is an understatement. And so if we were to see a normalization, is it fair to say that, within the next 2 years, we could see again a normalization in 2020? Could we see within a 2-year time frame you're hitting those "long-term OR targets?"

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [80]

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Yes, Walter, the question of when 55% happens has a fair amount of moving parts, which is why, at this point, we haven't put a stake in the ground and say we think it's, at this date, certain. We continue to work to try to understand that ourselves and build a model and scenarios that we believe in, that get the path there. But stepping back and just thinking broadly about it, things that help would be favorable mix, more volume growth. I have a lot of confidence -- all the confidence in the world in our ability to generate productivity and a great service product regardless of what the environment looks like and then making sure we have a pricing environment, right? We constantly talk about those 3 levers to pull, and there's a lot of moving parts on those 3 levers being volume, price and productivity. Certainly, productivity's going to get tougher and tougher as we get closer and closer to that 55%. And we're making a hell of a step. We made a hell of a step in 2019, and we're signing up for another good, strong step in 2020. And I think, over time, it'll become a little but more clear to us.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [81]

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Do you think like if you -- halfway through the year, you get some more visibility to put a stake in that time frame halfway through the year when you get a little bit more data points to work with?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [82]

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Walter, we're closer to that time than we were this time last year. And you and the rest of our investors and analysts will be the first to know when we're ready to put a stake in the ground.

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Operator [83]

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Our next question is from the line of Jason Seidl with Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [84]

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Jim, just wanted to check in on sort of how you're viewing operational performance versus the volumes that are coming through on the network, especially as we look into the back half of the year when some of your businesses might inflect specifically domestic intermodal, given your views on the truck market and sort of your year-over-year comps. Should we look at the network being slightly more challenged in 2H '20?

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Vincenzo James Vena, Union Pacific Corporation - COO [85]

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No, I don't see any challenge. That's the best thing that could happen is we've given Kenny and the whole marketing team a service product that allows them to sell, be able to go out there and whatever the market can give, we should be able to win. And we want to win with our customers. So as they come on and we see a volume increase, that's the best thing that could happen.

In fact, an increase in business allows us to use the same trains with more railcars on it and allows us to move things. There's some, of course, always -- if it's a unit train business that comes on, you have to put new trains on, but we do everything we can to run them on manifest and intermodal trains. So I'd be very excited if the market gave us strong growth. We'd put it on the same trains, and you'd see incremental savings in our cost structure for the amount of revenue we bring in. So that'd be the perfect scenario for us.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [86]

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I'll knock on wood for that then. My follow-up question's going to be for Kenny. Kenny, how do you view the shift we've seen in some global supply chains with the trade war? We've seen a lot come back to North America, in general, Mexico, and then we've seen some go to Southeast Asia. How should we think about that impacting volumes from here on out?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [87]

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Well, ideally, that would be short-lived, some of the product that's originating in Southeast Asia. As you know, a lot of that is going to the East Coast. So with a stronger trade agreement, we'd expect more to come back to the West Coast. I can tell you that we've had really good engagement across the supply chain, starting with the international intermodal folks, to make the West Coast ports in the U.S. more competitive, and we'll continue to do that.

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Operator [88]

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Next question comes from the line of David Vernon with Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [89]

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I do have a longer-term question on costs, and then I wanted to have a follow-up as well. If you think about the business being down about some 20% in revenue ton-miles the last 5 years or so, when you guys think about nominal cost inflation in this 2% to 2.5% range, is it right to think that the effective cost on a unit level for the business is a little bit higher as the base of business shrinks with the decline of coal? Or is that not the right way to think about the fixed cost leverage in the business?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [90]

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So David, you're talking about, on a revenue ton-mile basis, how should we think about our cost structure? I mean, one of our challenges that we've put to the team every year is that we want to offset inflation. But when you have some of your higher RTM, I think this is where you're getting to your heavier tonnage volumes falling away from you, that does make it harder for the team to be able to keep up with that. But I think that's the great power of the UP franchise is the productivity that we've been able to drive and the work that's underway, quite frankly, to get better at that and to be even much more diligent with that. And actually, weight can be a help to us. As we try to build those longer trains, it's going to improve our fuel efficiency.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [91]

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Well, I guess, I was thinking it was kind of more from an effective cost inflation perspective, right? Does the remaining traffic on the network have a little bit more burden to pay for every year? Or is that not the right way to think about it?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [92]

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Well, clearly, we are a significant fixed-cost business. And what we've demonstrated in long-term variable costs, there are different pieces that have different lives in terms of being able to adjust up or down. So in an environment that you just mapped out, which is the one we've lived the last 5 years, if volume's going down, and it's going down in a dramatic fashion, it is hard to keep up. That's, I think, one of the reasons that we're praising our employee base and the team so much on this call is that they've done a hell of a job in a pretty difficult volume environment eking out productivity even in the fourth quarter being a great example. You got volumes down double-digit percent, and yet, we generated, what, a couple hundred million dollars in productivity in the quarter.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [93]

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Okay. And then maybe just as a follow-up. Jennifer, if you look at your core or your mix price on the revenue slide in there being up 2.5%, it looks like there's a pretty big mix tailwind because your declines were in your lower RPU traffic. Does that imply like a smaller contribution from core price in the fourth quarter? Is that not the right way to read that slide?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [94]

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No, I think we got a similar question earlier. And mix was slightly positive in the quarter but not a significant driver of that number.

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Operator [95]

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The next question's coming from the line of Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [96]

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So on CapEx, you gave the guidance for this year, but I wanted to get your updated thoughts on CapEx longer term. If we're in this period where we start transitioning to a volume growth environment over the next several years, is there now enough capacity in the system to where you can hold CapEx relatively steady on an absolute basis as we look at kind of 2021 and maybe just over the next several years?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [97]

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Yes. So I'll start out, and then Jim might want to chime in as well, but the great power that we're seeing through our Unified Plan 2020 implementation is through the idling of hump yards, closing terminals and other facilities. We are creating latent capacity in our network that we would hope to be able to deploy again as the volumes come back. So to your point, we do see kind of a structural downshift that we're able to enjoy for some period relative to our capital expenditures. And when you think about the number of locomotives that we have idled, the freight cars we have parked, that's capacity that we're anxious to deploy again and to be able to use in the marketplace. So I think you're thinking about it right, but Jim, you might want to have some additional comments?

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Vincenzo James Vena, Union Pacific Corporation - COO [98]

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Well, Jennifer, I think you hit the high spots. What we're doing is this is, is we're able to run the capacity. If you look at the capacity in the railroad, we're going to spend some money targeted to make sure that we can operate the trains more efficiently in places where we think we can lengthen the size of the train. But on the -- most of the network, this network is built so that we can handle more traffic. I do not see big investments in locomotives, of course. We've got lots of them parked. I don't see a big investment in railcars. We're turning them faster. But is there going to be some targeted investments that we need for growth and for customer and just cars that are getting old? Absolutely. Keep the place current, sustainable over the long term.

So I don't see anything on the railroad where we need to worry about spending capital to make it more efficient or worried about some business coming on. That's the best thing that could happen. And we'll continue to spend capital with the projects that we've announced going down and building, changing the intermodal franchise in Houston, in Chicago. And stay tuned. We'll announce some more. We are going to spend capital on those to make ourselves more efficient to have a better service product. So it's a great place to be. We've got lots of capacity. Let's bring the business on.

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Justin Trennon Long, Stephens Inc., Research Division - MD [99]

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That's helpful. And as a follow-up, I may have missed your answer to this on the coal outlook for 2020. I know you expect it to be down, but is there just kind of a rough sense you can give us on the order of magnitude? And I think last year, around the beginning of the year, you lost a coal contract. Is there any way to frame up how much of a headwind that was in 2019 and exactly when you start to lap that?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [100]

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Kenny?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [101]

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Yes. Again, I mentioned this. I believe it's a little bit too early to go in and say what's going to happen out there 3 weeks in. Yes, we did lap the contract, or we will lap that contract here this year on the coal side.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [102]

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Yes. So being clear, that contract loss was lapped at the end of last year.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [103]

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Correct.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [104]

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So this, we are now fresh ground.

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Justin Trennon Long, Stephens Inc., Research Division - MD [105]

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And is there any way to size that up in terms of carloads and what that headwind looked like in 2019?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [106]

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No, we're not going to size that up. What we've -- expect out of coal this year is it's starting out pretty challenging. If natural gas stays at the $2, $2.25 level, it's going to be a tough year.

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Operator [107]

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The next question comes from the line of Brandon Oglenski with Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [108]

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And apologies, I missed the first part of this call, but I guess, I wanted to follow up on that last line of questioning. Jim, specifically, with your prior employer, we saw a lot of growth from the past decade on the network, whereas Union Pacific, and I know there were some specific headwinds in the coal book and what have you, but I guess, really this question is for Lance or Jim, what is specifically changing on the marketing or the sales front that you think you could reengage your customer base to actually drive some tonnage and revenue growth through the network?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [109]

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Yes. So I'll start. And let's break growth into 2 pieces. One is, what are the markets like? What's the ground and the environment in which you're competing? And for us, as we look into this year, we think, broadly speaking, the markets start getting a little better, right? Significant tailwinds like in trade, like a soft truck market, like the pull-ahead to try to avoid tariffs in international and modal. Those things start abating and lapping. And so that should create a better environment for us to compete in.

Second part of that question is controlling our own destiny. And from that perspective, our commercial team historically has had an excellent relationship with their customer base. It's indicative of how we've implemented Unified Plan 2020, right? At the very beginning, we said, our goal isn't to break a lot of glass and alienate our customer base so that we have to come back around and go on a charm offensive. Our intent was we're going to take our customers along for the ride and keep them well informed and help them see how the changes that we're asking them to go through as well as we're taking ourselves through create a much better and much more reliable service product.

That has occurred. That's in the process of occurring. And now our commercial team's taking that and turning it into new business like the business Kenny mentioned up in Northeast Iowa, where we've got an intermodal service product up the West Coast that, 2 years ago, would have never happened. And now it's generating very attractive volumes. The same is true in the agricultural markets. The same is going to be true across our book.

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [110]

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Yes. And the only thing now I'll add, I could rattle off a few things, and I want to just walk you through it. Again, the service product has improved. That's on tighter standards. So we've got a tougher grade now for the customer. The containers are being used more efficiently because the container dwell has gone down. We've also inserted technology into our network with our intermodal terminal reservation system, so they get clearer visibility of when they're going to get the container when they can expect it. We've reduced complexity out there in the network. Jim talked about Chicago and alluded to Houston out there. We've talked about Santa Teresa and the path and the fact that, on an intermodal network, we expect to do a lot of block swaps there so really critically being transformative here on the product.

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Operator [111]

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The next question is from the line of Allison Poliniak with Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [112]

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Can we just go to the capital -- CapEx conversation you guys were having before? Just in terms of, you think about it. It sounds like there's more of a targeted CapEx approach with the projects that you're implementing. Your line of sight over the next few years with the projects, is this a sustainable level of base capital? I mean, should we expect a downward trend to that number over time? Just any thoughts there.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [113]

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Let me step into that, Allison. So we've always been targeted in our capital. And by that, I mean, the very first thing we layer in is, what's it take to keep the doors open that's replacement capital? And for us, this year, on the track side, it's $1.85 billion-ish, and there's a little bit more when you look over into the equipment side. And then from that point, we've got to take care of mandates like PTC, and then we look for opportunity to invest where either there's targeted capital for growth or targeted capital for a service product enhancement, which ultimately is growth or productivity. And so everything that's in the capital plan is built like that. It gets our first call on our cash, and we are very comfortable that the level we're spending right now is an appropriate level, sub-15% of our revenue, and I don't really see that changing as we look forward.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [114]

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Great. And then just going back to the operating. You highlighted a number of operating levers that you can still pull here. Not that any of them are easy, but which ones do you start to see becoming more challenging in 2020 just based on the improvements you've made thus far?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [115]

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Well, you know what? It's always difficult to make big change, but I don't see any of them. We've got a line of sight of what we need to do. I think we are going to deliver on those -- all those items that I listed off earlier on in the call. And I don't see anything impacting us where we are not going to be able to deliver. It's -- we see line of sight. We know what we have to do. We've got the right people that can make sure we deliver it. And I'm looking forward to just -- and we're doing it in a nice, smart, measured way so that we don't impact our service. So I don't see anything really holding us up.

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Operator [116]

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Our next question is from the line of Jairam Nathan with Daiwa.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [117]

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So I just noticed that there was a lot of talk about safety in your comments. And if I look at other expenses, they were up about 5%, and he's talked about increased casualty costs and expecting another 5% increase this year. Have you -- are you kind of expecting a similar casualty number? Or should we see some benefits from the focus on safety?

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [118]

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This is Jennifer. No, we are absolutely focused on safety, as you said, and we are not expecting a similar level of casualty costs. We absolutely believe we'll be much better in 2020. What that 5% of guidance includes is higher state and local taxes primarily, which is we -- as we become more profitable, those taxes go up.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [119]

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Just to add on safety because I think it's really important that we talk about it for a minute, and I appreciate the question. So key foundation for a railroad in the industry and what we do every day is safety. We are not happy with the -- with where we are overall. Our goal is just to be the most -- the best, most efficient railroad in North America, and that includes in safety. So we've got lots of positives that we see on one side of it, but on the other side of how we handle and measure safety, we need to get better. And we're working hard. We've seen the trend line get better at the end of the year, and I would expect us to continue that this year. Our goal is just to be the best railroad in North America, and that includes the best in safety. So that's what we're working towards.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [120]

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Again, just as a follow-up. With the USMCA passing, do you see any -- has that -- do you see any changes near term? And how does that impact 2020 volume?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [121]

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Yes. So with the past USMCA, it does take a little bit of a headwind and turn it into a tailwind. It was mostly about uncertainty in risk-taking and where investment was occurring. So I would anticipate that'll have kind of a long-term, slow positive impact on our overall volumes.

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Operator [122]

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Your next question is from the line of Cherilyn Radbourne with TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [123]

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Just a couple of quick ones from me. On the locomotives that you've got in storage, historically, Union Pacific has maintained a surge fleet. So just curious for your thoughts on what size you might need in terms of a surge fleet, and whether you would plan to start returning or selling the balance of those locomotives.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [124]

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Well, 2 things, and Jennifer could jump in anytime. I think if we could find a buyer for some of the locomotives that we have excess, we were able to dispose of some, we would do that. And as far as a surge fleet, Cherilyn, it all comes down to we've got a number of locomotives in normal status, so we could just go turn the switch, fuel them up and start running them. So if we needed to put them back in service, it would be a pretty easy task. And we're talking in the hundreds of that number. That's the surge. It's sitting there ready to go.

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Jennifer L. Hamann, Union Pacific Corporation - Executive VP & CFO [125]

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Yes. And just to highlight, Cherilyn. So we did, in the quarter, reduce our total locomotive fleet by about 300. We sold a couple hundred. We did find a buyer, and we scrapped another 100 or so. So we are continuing to evaluate those things at all points and looking at what's the best financial decision for us to make as a company. But we look forward to bringing those locomotives that are in storage and putting them back into service because we do think that's the most cost-efficient way to handle future volume growth is to leverage that existing fleet.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [126]

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Okay. And then on the improvement in train size that you referenced, should we assume that most of that still resides along the Sunset Corridor and that the siding extensions that are penciled into the CapEx budget are directed to that region?

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [127]

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I think we're going to see the extension of the Sunset with the CapEx that we're putting in on the sidings. That will help, but we also see -- to be able to deliver bigger trains with the volume decrease, the team did a great job. So if we see a -- volume will help us if we have a slight uptick in volume. But on top of that, I see benefit across the whole network. We're just starting down here -- down on the train length in every one of the corridors. So there's a little bit in all of them. A major piece will be the -- through the capital investment, Cherilyn.

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Operator [128]

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Our next question comes from the line of Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [129]

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On the growth question, you guys have talked about an improved service product in probably a dozen of your answers to the Q&A today. That seems to be resonating with your message, and it certainly is showing up in the trip plan compliance going from, call it, low 60s to mid-70s in the span of a couple of quarters here. Are your customers starting to feel that? And when does the network get to sort of a stable, steady fluid state where you really unleash the sales team and are confident that you can deliver industry-plus growth on a go-forward basis?

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Kenyatta G. Rocker, Union Pacific Railroad Company Inc. - EVP of Marketing & Sales [130]

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Yes. Just -- Bascome, thank you. Just to give a history lesson here, last year, during the first half, we had what I call both weather and a lot of changes to the network. And we were talking proactively with our customers about what would happen. By mid-third quarter, call it, the second half of the year, our service product that the operating team gave us, I mean, it really picked up. And customers really got confident there. We have a number of internal measurements and surveys that we do that we look at really every day. And we are seeing that our customers are communicating through that and then talking with them that they see it. Our sales team, they're sitting down with them, laying out the benefits, selling the service, quantifying the value proposition that's there. So it's really setting up a good 2024.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [131]

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And lastly, Unified 2020 Plan, I think you launched that in late 2018. Jim has been in the seat a year. Jen just took over in the CFO role, and you're going to exhaust your buyback this year. Should we expect a detailed deep dive Investor Day sometime in the second half? Just anything you can do to help us on the time line and when you'd be ready to give us a bigger update.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [132]

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Yes, that's a great question, Bascome. We are talking about when's the next good opportunity for us to, in a concentrated way, tell the story of what to expect. And so stay tuned. We will -- when that story's fully baked and needs to be shared, we will share it. And it wouldn't surprise me if it's later this year.

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Operator [133]

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This concludes the question-and-answer session. I'll now turn the call back over to Mr. Fritz for colors and comments.

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Lance M. Fritz, Union Pacific Corporation - Chairman, President & CEO [134]

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All right. Thank you, Rob, and thank you all for your questions and for being with us on our call this morning. We look forward to talking with you again in April as we discuss our first quarter 2020 results. Thanks.

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Operator [135]

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Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines at this time. Have a wonderful day.